Although it has recently had to shed some of its badly performing subsidiaries, British Telecommunications (BT) is suddenly able to pat itself on the back. The UK telecom group has been named as the top telecom in the Dow Jones global and European sustainability indexes, usurping Deutsche Telekom (DT) and giving investors at least one reason to keep their faith. The last 18 months have been precarious for the telecom industry. Huge increases in debt were followed by credit downgrades, which in turn were followed by falling share prices and announcements of big job-cuts. But whereas DT has maintained a regular presence in the Euro-MTN market - it has issued 38 trades this year totalling over $5.5 billion - BT's treasury, in an effort to keep the rating agencies happy, has been trying to reduce its debt from a peak of $30 billion to less than $10 billion. This has meant doing very little in the Euro-MTN and Euro-CP markets. BT's last MTN issue was in October last year, and although it made a spate of CP trades in April and May this year, there has been nothing since. A source close to the BT treasury says they have no need to issue at the moment, though they will be watching the markets and do plan to use their facilities again. But the news from Dow Jones means investors can feel more confident in their appraisal of the UK telco. Adrian Hosford, director of BT social policy, thinks the ramifications for BT's financial image could be great. He says: "This is a major achievement. Sustainability is becoming a hot issue for investors, and although some traditional investors look purely at the short-term profits, the more serious-minded investors will be taking the whole performance into account. I think that, ultimately, these indexes could even influence the credit ratings of a company." The Dow Jones Sustainability Indexes (DJSIs) rate companies on economic, social and environmental criteria, giving roughly equal weight to each dimension. The value of these indexes to investors comes from the fact that companies with high sustainability rankings are assumed to have disciplined management teams. BT is the top telecom in the DJSI World, which was launched in September 1999. It is now also top of its sector in the DJSI STOXX, the European version, which was published last Monday, October 15. Hosford said in a BT press release: "Achieving this ranking is particularly important because investors have driven it. A growing number now share BT's conviction that integrating economic, environmental and social success factors into business strategy can result in competitive advantages." Although DJSI World has been published for two years it is the first time BT has gone to the top spot. Previously DT was top, and it gave the UK group a close run this year in both the DJSI World and the DJSI STOXX. Edoardo Gai, assistant sustainability analyst at SAM Group, which is the operating company of the DJSI, says: "Everyone thinks this is about Deutsche Telekom and BT. The last two years DT was leading, now it is BT. Next year we expect the competition to be very close indeed." Hans Ehnert, head of corporate communications at DT, is not as enthusiastic as Hosford, at BT, about the relevance of the DJSI however. He says: "It is one criterion for evaluating the investability of a company. It could attract investors who are interested in our values, but different investors have different priorities. And I doubt that any index could influence a rating agency." Merrill Lynch is the arranger and sole dealer off BT's $20 billion Euro-MTN programme, and is also a dealer off DT's euro15 billion ($13.59 billion) debt issuance programme. Dean Fogg, a trader on the MTN desk, also takes the view that only well-established indexes can affect investors' opinions. He says: "If the index is a tracker fund, or acts as an established benchmark for the market, then investors might take note of how a company is doing. But otherwise it's highly unlikely that it will have much effect." BT's lack of activity in the MTN market compares starkly with DT's commitment to frequent issues. The German firm has been especially busy in the last two quarters, issuing 99% of its trades this year in that period. Norbert Zimmerman, head of debt trading at DT, says: "We want to stay with the market and keep our level of outstandings between euro7 billion and euro12 billion." But he does not think that BT's absence from the market has any effect on DT's ability to place paper. He adds: "We have a separate credit to BT, and it is a well-known credit, so our issuance does not depend on BT's activity." BT's Baa1 senior unsecured rating from Moody's is two notches below DT's A2 rating, and the UK company thinks that its performance in the DJSI could help compensate for its weaker credit. But Carlos Winzer, senior president, European market at Moody's, and the analyst for BT, thinks the nature of the sustainability indexes, incorporating not just economic but social and environmental factors, could be more than the average investor wants. He says: "Moody's sells its own index to investors which I am sure they use for investigating investability. But ours, among other things, measures probability of default, and that is what the investor is worried about." Gai, at SAM Group, disagrees, saying: "I believe this method will grow, and could be used to evaluate potential investments in the future."
October 19, 2001
